ATO guidance provides clarity on death benefit confusion

ATO guidance released yesterday has provided peace of mind for SMSFs receiving death benefit pensions in excess of $1.6 million, with the guidelines applauded by those in the SMSF industry.

The ATO yesterday released Practical Compliance Guideline (PCG) 2017/6 Superannuation reform: commutation of a death benefit income stream before 1 July 2017, which outlined the ATO’s compliance approach towards SMSFs that commute death benefit pensions prior to 1 July 2017 and retain the excess in the fund.

Prior to this guidance, SuperConcepts technical services and education Peter Burgess said there had been a lot of confusion in the industry in relation to whether a super fund could commute a death benefit pension and retain the excess in the fund, if the commutation occurred before 1 July 2017.

While the SMSF industry has always understood that funds would not be able to do this after 1 July, there was some contention over whether funds would be able to do it before 1 July 2017.

“There’s been a fair bit of confusion in recent times about the options available to members who are receiving a death benefit pension, if they have a pension balance in excess of $1.6 million. There’s been some uncertainty about the options available to them in terms of commuting the excess and retaining the excess in the fund,” Mr Burgess explained.

The SMSF industry believed it would be possible to retain the excess in the fund based on public guidance material previously issued by the ATO, he said.

While the ATO expressed the view in the guidelines that it would not be possible for people receiving these death benefit pensions to commute these pensions and retain it in the accumulation phase, the tax office has decided to take a practical approach, since it is a common industry practice to do so, Mr Burgess said.

“The ATO, therefore, won’t apply or take any compliance action, where one of these pensions has been commuted and the proceeds have been retained in the accumulation phase prior to 1 July 2017.

“The ATO should be congratulated here. This issue came to light at some recent industry consultations and they moved very quickly to explain this particular issue and to agree on a practical compliance approach.”

This is currently a live issue for a number of individuals receiving death benefit pensions.

“With the release of these practical compliance guidelines, clients now have some certainty and peace of mind that they can commute that excess and retain it in super, as long as it’s done before 1 July 2017,” Mr Burgess said.

“It enables advisers to have some certainty when providing advice to clients as to what their options are, so if they are receiving one of these death benefit pensions and their pension balance is in excess of $1.6 million, we now have some certainty and peace of mind that they can commute that excess and retain it in super. There’s no need for that excess amount to be cashed out of super.”

Mr Burgess said the guidance will also simplify things from an administration point of view.

“SMSF trustees now won’t have to identify any pension balances that comprise a death benefit pension. It doesn’t matter under this guidance, whereas without this guidance they would have to identify any portion of the pension balance that relates to a death benefit pension, and that can be very difficult,” he said.

“That’s one of the reasons the ATO is saying they’re not going to apply any compliance resources here, because it’s just too difficult for funds to identify a death benefit pension where it’s been mixed with other money in the fund.”